Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, eXp World Holdings, Inc. (NASDAQ:EXPI) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does eXp World Holdings Carry?
As you can see below, eXp World Holdings had US$2.56m of debt at June 2020, down from US$2.73m a year prior. However, it does have US$63.6m in cash offsetting this, leading to net cash of US$61.0m.
How Strong Is eXp World Holdings's Balance Sheet?
According to the last reported balance sheet, eXp World Holdings had liabilities of US$74.6m due within 12 months, and liabilities of US$1.76m due beyond 12 months. Offsetting this, it had US$63.6m in cash and US$52.5m in receivables that were due within 12 months. So it actually has US$39.8m more liquid assets than total liabilities.
Having regard to eXp World Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$2.56b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that eXp World Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, eXp World Holdings turned things around in the last 12 months, delivering and EBIT of US$8.0m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if eXp World Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. eXp World Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, eXp World Holdings actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that eXp World Holdings has net cash of US$61.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 883% of that EBIT to free cash flow, bringing in US$71m. So we don't think eXp World Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for eXp World Holdings that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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